A favorable turn in cotton linter when cottonseed stabilizes?

Cottonseed and cotton linter prices have been falling much slower since Dec after shedding at the end of Oct. Cottonseed even saw minor rebound and cotton linter has slightly stabilized since mid-Dec, but refined cotton still shows weak appearance. The sharp decline is affected by macro-factors as well as changes in supply-demand relationship.

As a primary agricultural product, cotton linter not only shows obvious characteristics of cyclicity, but also possesses certain attributes of financial inflation, which is closely related to the tightness of monetary policy. According to data released by the central bank of China, the balance of M2 was 235.6 trillion yuan at the end of Nov 2021, a year-on-year increase of 8.5%. The balance of M1 was 63.65 trillion yuan, a year-on-year increase of 3%. From Jun 2020 to Jun 2021, the growth rate of M1 remained high at 6-15%.

In addition to the influence of macro economy, cottonseed supply was increasing rapidly in Oct with the arrival in Sep and the price had been surging since the end of Oct, but then diving quickly. Now Shandong and Hebei-origin cottonseed is at 3,100-3,120yuan/mt, which is just 200yuan/mt higher than that of early Jan 2021. Therefore, cotton linter prices gradually dip with less support from cost and dropped steeply in Nov. Due to cost and restocking for the Chinese Lunar New Year, cotton linter price has slightly stabilized since mid-Dec. Now cotton linter for industry-grade refined cotton is around 5,900yuan/mt, which is 2,000yuan/mt higher than that of early Jan 2021.

Cotton linter as the source of cotton linter pulp and refined cotton is not strong, coupled with lackluster demand of cellulose ether and nitrocellulose, refined cotton market has been depressed. Now industry-grade refined cotton prevails at 12,000-12,500yuan/mt, more than 4,000yuan/mt higher than that of early Jan 2021.

In Nov 2021, the US began to shrink its balance sheet (the Federal Reserve began to reduce the scale of debt purchases), and the expectation of possible interest rate rise in 2022 indicates that the US will gradually withdraw from the easing policy. Coupled with changes in supply-demand relationship, the outlook for cotton linter market may be mixed.